MUMBAI: Elevated level of non-performing loans and continued low growth as demand for loans remained muted will continue to hurt profitability of banks.
Lending by banks grew at a modest pace of 9.7 per cent in the year to March 2015, or the slowest growth in a decade, compared with 15 per cent in the year ended March 2014. Growth was concentrated in retail assets, and could be an area of future pressure, given the surge in the pace of growth, Fitch ratings said in a report.
Banks still need significant amount of capital. Weak internal capital generation, low equity capital market valuations, and Basel-3 migration means ongoing high reliance by state banks for external capital, with resort to government and hybrid capital in the interim, it said.
In the year to March 2015, the ratio rose to 11.1 per cent from 10 per cent a year earlier. A large part of the push came in the second half of fiscal 2015, that included restructuring of loans by state-run banks.
Growth in the economy should help asset quality cycle but the process will take time, Fitch report said.